As I finished my federal income tax return for 2018, I could not help but think about a return I filed 30 years ago. What caused my fiscal flashback? This was the first filing season under the Tax Cuts and Jobs Act (TCJA), the largest tax overhaul since the Tax Reform Act of 1986 (TRA86). Fortunately, I am a packrat and still had my return from 1988, the first year that TRA86 was fully phased in.
The comparison was striking. Even though the income on my 2018 joint return was much higher, my household paid a lower effective tax rate than for 1988. Just let that sink in – while America’s fiscal challenges have increased, my tax burden has declined while my income has grown.
In many ways, my circumstances are about the same as they were thirty years ago. For both years, I filed a joint return, had no dependent children, and my spouse and I both had earnings—primarily from our salaries. I didn’t claim tax credits of any consequence in either year.
However, the amount of income reported on my joint return was very different. After adjusting for inflation, it was about 50 percent higher for 2018 than for 1988. I also claimed more in itemized deductions this year, adjusting for inflation.
The result: My effective income tax rate (income tax liability divided by adjusted gross income) fell from about 21 percent in 1988 to about 19 percent for 2018. How could my effective tax rate decline even though my household income increased substantially? Well, to start, Congress cut taxes on households like mine in 2001 and 2003, and largely continued those tax cuts in 2012.
The 2017 TCJA cut our taxes even more. (Here is the Tax Policy Center calculator that shows the effects of the TCJA.) Overall, these cuts far outweighed the tax increases on households like mine in 1993 and in the 2010 Affordable Care Act. The net effect: I paid a lower effective tax rate even though my income increased substantially.
What happened to the federal spending that my taxes supported over the past three decades? While it bounced around a bit over the years, it was just above 20 percent of Gross Domestic Product in both 1988 and 2018. So, in a sense, while my ability to pay taxes has increased, I am contributing less for about the same level of governmentally-provided goods and services.
In recent years, the federal government has stepped away from its fiscal responsibilities by increasingly relying on deficit financing. And my declining effective income tax rate is a case in point.
